Transcript of a Conference Call on Pakistan

February 6, 2012

Washington, D.C.
Monday, February 6, 2012

MR. ANSPACH: Good morning, everybody and thanks you for joining this teleconference. This is Raphael Anspach, with the External Relations Department of the International Monetary Fund, in D.C.

Joining us today for this conference call on Pakistan is Mr. Adnan Mazarei, who is the IMF Mission Chief for Pakistan. And two of his colleagues who are senior desks for Pakistan, as well.

Now, before we start, let me remind you that this call and the PIN to which you have access today are embargoed until 9:45 am D.C. time.

With that, I'd like to now turn it over to Mr. Mazarei, who will have short introductory remarks, and then will be happy to take your questions. Thank you. Mr. Mazarei.

MR. MAZAREI: Thank you very much. Good morning, ladies and gentlemen. Thank you very much for taking the time to listen to our views on Pakistan.

As you may be aware, we had a Board meeting on Friday, on Article IV discussions with Pakistan. Directors were very much in sympathy with the experience of the Pakistani people in recent years, –expressed their dismay about the population’s experience of the floods, security problems, and the general economic difficulties.

The IMF’s Executive Board indicated that Pakistani policy-makers have taken important actions, and implemented several reforms in the wake of the crisis in 2008. These actions have included establishment of an interest rate corridor, a more market-oriented exchange rate system, and an improvement in enforcement powers of the central bank.

In addition, the authorities have substantially raised electricity tariffs and domestic prices of the main petroleum products, but at the same time have taken some steps to support the most vulnerable segments of the population through the Benazir income support program.

More recently, however, with unresolved structural problems, especially in the energy sector, vulnerabilities have increased. And, of course, these vulnerabilities should be understood in the context of a much more difficult global environment. Real GDP this year is expected to grow at 3-1/2 percent -- well below the 7 percent that is needed to absorb the two million new labor market entrants that join the labor force annually. Additionally, inflation is persistently in double digits.

Last year, the fiscal deficit widened to 6.6 percent of GDP. And monetary policy was accommodative.

This year, while the economy is recovering from the floods, the external position which, until recently, was a source of strength on the back of booming exports and workers' remittances, is deteriorating somewhat, and there have been some pressures on the Pakistan rupee.

In 2011/12, we expect GDP, as I mentioned, to be about 3.4 percent, and CPI inflation at about 12 percent. In the absence of corrective measures, the fiscal deficit is likely to reach 7 percent of GDP. Now, if the authorities succeed in selling 3G licenses, of course, this deficit will be lower.

Our Executive Board noted that in light of this background, there were measures that would need to be taken in the short run to reduce vulnerabilities. And at the same time, measures that needed to be taken to raise growth and make sure it is inclusive growth over the medium term.

To address these vulnerabilities, a short-term action plan is needed that includes strengthening of public finances, and a tightening of monetary policy if inflation increases. It is particularly important to address the problems in the energy sector, and also the public enterprises which are consuming a large amount of subsidies and resources every year.

With regard to creating employment opportunities and raising living standards, what is needed, is first and foremost, fixing the energy supply, reducing the state's footprint in the economy by restructuring loss-making public enterprises, improving the investment climate, civil service reform, and also taking steps to improve the situation in the financial sector to allow better channeling of savings to borrowers and to investors.

I will be very happy to answer any questions you may have at this moment.

SPEAKER: Yes, Mr. Mazarei, thanks for this important information. I would like to ask you -- you mentioned energy sector and the problems created by it, and the issue of subsidies, as well as the external situation. And you particularly mentioned the remittances decreasing.

So, what is the reason for this external situation to go down, because Pakistani policy managers are very hopeful about it? And what are your recommendations for the energy sector, and for the subsidies as they are now?

MR. MAZAREI: Thank you very much for your question.

On the external sector, the deterioration is coming, in large part, because of the developments in the international economy. Commodity prices, prices of cotton and textiles for Pakistan in particular, have come down drastically, while at the same there are important risks to oil prices.

And because global economic activity is not robust, the demand for Pakistani products is coming down. And this may also affect remittances.

On energy sector issues, as you know, the Fund is not an expert. And we often defer to our colleagues in the World Bank and the Asian Development Bank for the technical plans as to how to address these sector problems. And the case remains so.

What we indicate to the authorities -- and the authorities are quite aware of this -- is that without structural change in the energy sector -- and this doesn't just mean price increases, it means fundamental changes in the structure and the management of the sector -- untargeted electricity subsidies will remain large, at about 2 percent of Pakistan’s annual output which, by all measures, given the resource base in Pakistan, is quite high.

SPEAKER: Yes. Good morning. Two questions.

One is about the monetary policy. So I just want to make -- you say it's "too accommodative," but then you say it should be tightened only if -- well, not "only," but if inflation accelerates.

So did you consider that rates are too low at this point, and should be increased as soon as this month? Or it's not that urgent.

And, second, regarding the IMF relationship with Pakistan, when are they starting to repay the first loan? And is there any talk of a [renewed] loan?

MR. MAZAREI: I’ll start with your second question.

Repayments to the Fund start in February, and the authorities have not requested a new program.

On monetary policy, I'm not going to comment on whether their rate should be increased or not at this stage. But what I would like to say is that, in the past year, the government has been borrowing both from the Central Bank, and large amounts from the commercial banks. The Central Bank has been injecting large amounts of liquidity into the money markets -- which will push up prices, and eventually raise considerable pressures on interest rates.

SPEAKER: Good morning.

I was wondering if you could give us a sense of -- I mean, the IMF uses all these words about re-orientating the economy, you know "vulnerabilities," and so on.

But, you know, in short, it looks like Pakistan is pretty much in dire straits right now. And what are the -- you know, beyond the steps that it needs to take, and obviously will take some time, including, you know, management of its finances and stuff.What immediate steps need to be taken to help its situation?

And then, I suppose, would you give any kind of advice to the Central Bank, and what they should do in the upcoming monetary policy meeting on February 11th?

MR. MAZAREI: Well, as you correctly said, Pakistan is facing vulnerabilities. By "vulnerabilities" we, of course, mean pressures and risks.

The way we recommended to the authorities to address these vulnerabilities is to recognize that we are all, including Pakistan, living in a more dangerous environment because of the deteriorating global environment -- and to build buffers.

One, to make sure there is immediate reconsideration of some of the non-essential spending in the budget.

Two, making sure monetary policy doesn't end up pumping in too much rupees in search of dollars.

Third, to protect foreign exchange reserves by making the exchange rate more flexible. And, to the extent possible, seeking financial assistance from donors.

SPEAKER: Yes, thank you very much. And good morning, everybody.

My first question is regarding the fiscal deficit, as you mentioned, that it will be around 7 percent of GDP, but if the government succeeds in auctioning the 3G licenses, it will be a little less. Of course, that will depend on the price that the government sees for the 3G license.

But could you just tell us how much would be -- what would (inaudible) if the government succeeds in the 3G auction license?

And also, my second question is that this year, as you mentioned, that Pakistan has to pay $1.2 billion to the IMF [FY 2011/12].

In the next couple of fiscal years, the bigger loans have to be paid back. Do you see any other dollars coming in, into Pakistan, that would help Pakistan to pay off its IMF loans and not dent its exchange rate to a big extent?

MR. MAZAREI: First and foremost, on the budget.

The authorities estimate a maximum of about $700 to $800 million from the sale of 3G -- which, if it happened, will bring down the budget deficit to around 6.6% of GDP. But that's the maximum, and I have no idea about how much may actually earned on these 3G licenses.

With regard to foreign inflows, there are various donors, official and bilateral, like the World Bank and ADB, and the Islamic Development Bank, and others, who have regular disbursements to Pakistan, which should be coming in. Now, depending on -- the adequacy of these will, in large part, depend on, especially, the commodity price outlook, and how this outlook materializes, especially for cotton and petroleum products.

SPEAKER: Thank you. Good morning.

I would like to ask a question about unemployment. You're saying that unemployment is high, when you take into account underemployment, or unpaid employment. And you say that unemployment should rise, since growth is too low to employ people who are entering the labor market.

But you don't give any figures. Could you give us a sense of how high the unemployment rate is in Pakistan right now?

MR. MAZAREI: The official unemployment rate is 6 percent now. But this figure does not capture the partially employed and, for instance, household workers who are not paid.

The problem, in addition to the level of unemployment, is that there are about a couple of million people who enter the labor force every year. And, as I noted, the authorities, in their growth strategy, have indicated that they need about a growth rate of 7 percent per annum to absorb this increase in the labor force. And with growth rates of 3 to 4 percent per annum that we have right now, the task of creating jobs is becoming more difficult.

SPEAKER: A follow up question if I may. Six percent is the official rate, but it seems very underestimated. Can we say it's -- the unofficial rate could be twice or three times this one?

MR. MAZAREI: I am not in a position to give you an indication. It certainly is higher than this.

SPEAKER: Mr. Mazarei, I was wondering if you could give us a sense of whether Pakistan is headed for a balance-of-payments crisis? And there have been some -- I mean, I just want to clarify, are you still disbursing -- you're not disbursing any more to Pakistan, are you?

MR. MAZAREI: The [Stand-By Arrangement] program ended last September.

And we are not disbursing.

Now, like a lot of countries in the world right now, the external outlook for Pakistan is [uncertain]. Until recently, exports, especially of textiles, have been high, and remittances have been high.

Looking ahead, prices of cotton and textiles have come down and they [may] have bottomed out. And remittances are still strong, but they're subject to risks.

A couple of good things have happened in the recent weeks, too. One is the improving trade relations with India. And, secondly, there's a new arrangement with the World Trade Organization to give tariff exemptions to 75 items, which should help Pakistan's external position.

There are upside risks and negative risks, but unless there are measures taken -- especially to rein in the fiscal deficit, and the monetary policy tightening that is probably needed right now -- pressures on the rupee could continue.

At the same time, of course, much of what is happening in Pakistan's balance of payments and exchange market is affected by the political situation, which has a life of its own. And it's difficult to predict for us.

SPEAKER: One quick question regarding the fiscal deficit, again, and as you mentioned, the 3G license.

The Finance Minister (inaudible) after the 3G license he expects the Coalition Support Fund reimbursement to materialize during this fiscal year. And also, proceeds from Etisalat, $800 million.

So, have you not factored that in? And if that money comes in, then the fiscal deficit would improve a little bit?

MR. MAZAREI: We've done so to some extent, but a lot depends on how much and when. Of course, as you said rightly, the more through 3G, and the more the Coalition Support Fund come in, there will be more budgetary space, and the deficit will be lower.

Thank you.

MR. ANSPACH: Well, with that, I would like to thank Mr. Mazarei for his availability.And I would like to remind everybody that the call and the PIN to which you've had access are embargoed until 9:45 D.C. time.

Also I would also like to inform you that the Staff Report on Pakistan will be made available in the coming days.

Thank you very much again.

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